By Abhishek Vishnoi and Rafael Nam
MUMBAI (Reuters) - The BSE Sensex bounced back from a nearly four-month low hit earlier on Tuesday, erasing losses of more than 1 percent, as some blue chips such as ITC recovered on value-buying after the indexes had fallen in six out of seven previous sessions.
Value-buying also helped mobile service providers such as Bharti Airtel Ltd
Despite a late recovery, the Sensex is still down 5.4 percent since its record close on January 23, roughly the start of an emerging market shakeout driven by fears of an economic slowdown in China and the Federal Reserve's gradual wind down of monetary stimulus.
Foreign institutional investors (FIIs) sold a net $656.2 million in shares over the previous seven sessions since January 23. Analysts worry selling could accelerate after overseas funds bought a net $20 billion worth of shares last year, leaving them overweight and thus prone to take profits.
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The country also faces general elections due by May, creating another incentive to sell, according to these analysts, even as India had been tipped to avoid the worst of the selloff in emerging markets because of its improved current account deficit and build-up in currency reserves.
The Sensex and the Nifty fell at one point below their 200-day moving averages on Tuesday, although both closed above those levels.
"FIIs are the drivers of our markets and outflows certainly worry me. One thing is for sure, there will be no new FII money in India till elections," said Paras Adenwala, principal portfolio manager at Capital Portfolio Advisor.
"I think differentiation with other emerging markets should happen provided India's election results are palatable. People would remain defensive till that time."
The Sensex fell as much as 1.2 percent to its lowest since October 9, but ended up 0.01 percent, or 2.67 points, at 20,211.93.
The Nifty fell 0.01 percent, or 0.90 points, at 6,000.90 after falling as much as 1.14 percent, also to its weakest since October 9.
Losses earlier were driven after disappointing U.S. manufacturing data cast doubt on the health of the world's top economy, sending global stocks to a four-month low.
India is seen in a better position than last year when similar Fed tapering fears roiled emerging markets, sending the rupee to a record low and denting shares.
Domestic shares went on to post a sharp recovery in the second half of last year following measures by the government and the central bank to slash the current account deficit and boost currency reserves.
WIRELESS SERVICE PROVIDERS RALLY
Among large-cap stocks on Tuesday, ITC
Tata Motors
Bharti Airtel
Idea Cellular
Divi's Laboratories
However, software services exporters, which had hit record highs last month on expectations of an improving U.S. economy, led decliners.
Tata Consultancy Services
(Editing by Eric Meijer and Subhranshu Sahu)